Milking Taxpayers

Of all the senseless things that happen in Washington, farm subsidies are especially foolish. They are a classic example of “public choice” in action, with a handful of rich (and well-connected) producers getting big bucks by ripping off consumers and taxpayers.

The entire Department of Agriculture should be abolished. Yesterday, if possible.

If we first need a show trial, dairy subsidies could be the main example.

Investor’s Business Daily opines about the program.

In what other industry would you find producers continuing to ramp up production while demand slides, and then stuffing the growing pile of surplus into warehouses, hoping the federal government will buy some of it? What makes the dairy industry different is decades of government efforts to “support” dairy farmers with various subsidy schemes. …By interfering with pricing signals, the effect of these subsidies has been to encourage production, almost regardless of market demand. …Dairy farmers say they need these programs to survive. We doubt that. Like every other industry, they’d learn to adapt to market changes. In the meantime, ask yourself this question: Why should taxpayers hand over their hard-earned money to protect other people’s jobs in a declining industry?

Here’s a one-minute video from the American Enterprise Institute that gives a quick overview of how government doesn’t allow markets to function.

Congress currently is contemplating a new farm bill. As you might expect, there’s pressure from agriculture lobbyists for further subsidies and handouts.

Fortunately, there is also some opposition, including a recent column in the Hill.

Like spoiled milk, market-distorting dairy industry handouts need to be thrown out. …Washington doles out enormous subsidies to the largest conventional animal agriculture industries through the farm bill. …The dairy industry…receives their millions as a straight-up handout, with no strings (or string cheese) attached. The USDA should not pick winners or losers. The government should not distort the market or continually prop up non-competitive businesses. …American taxpayers don’t need to prop up a system of socialized cheese. American consumers deserve to make their choices in a fair and equitable marketplace. This next farm bill should remedy clear instances of government waste and distortion and move beyond funneling taxpayer handouts into conventional agribusiness.

The United States is not the only nation with a corrupt and distorting system of subsidies. Similar handouts exist in Canada and have become part of NAFTA negotiations, as reported by the Wall Street Journal.

U.S. farmers are treated unfairly by the complex “supply management” system that governs Canada’s dairy market, under which the government sets milk prices and imposes quotas on domestic producers to keep supplies in check. As part of this system, Canada limits dairy imports and imposes steep tariffs of more than 200% on products that exceed those limits. President Trump has called Canada’s dairy protectionism a disgrace. …Critics say Canada’s system unfairly limits market access and distorts prices. …Canada’s 11,000 commercial farms hold substantial political sway. The bulk of them are in vote-rich pockets of rural central Canada, especially French-speaking Quebec. …Dairy farming “is a motherhood issue here,” said Jon Johnson, senior fellow at Toronto-based C.D. Howe Institute and former government trade negotiator.

There’s no question the Canadians are guilty, but the United States is hardly in a position to throw stones.

Milk supply in the U.S. has in the past been seen as a national security interest, important to the well-being of babies and children. The U.S. government, for that reason and others, has had a long and historic involvement in domestic dairy farming, with a pricing system whose roots go back to the Great Depression. U.S. dairy imports are restricted through quotas, tariffs and licensing requirements. Prices are regulated through a complex system managed by the USDA, which sets minimum prices. When prices fall below regulated minimums, farmers can apply for federal assistance.

I suppose one silver lining to all this nonsense is that dairy farmers on each side of the border now have an incentive to calculate the subsidies received by their competitors.

…the American government continues to provide massive levels of support to its agri-food sector at federal, state, and local levels. …in 2015, the American government doled out approximately $22.2 billion dollars in direct and indirect subsidies to the U.S dairy sector. …said Mr. Clark. “When it comes to farm support, the U.S. has the deepest pockets; deeper even than the European Union…” in 2015, the support granted to U.S dairy producers represented approximately C$35.02/hectolitre – the equivalent of 73% of the farmers’ marketplace revenue. …While the American dairy industry has repeatedly pointed fingers and demanded increased access to Canada’s dairy market, the extent of subsidies to the U.S. dairy industry is an 800-pound gorilla in the room.

My hope, needless to say, is that taxpayers in both nations look at these numbers and conclude that we follow the example of New Zealand and get rid of farm handouts.

Not just for dairy. Abolish the entire Department of Agriculture.

P.S. It’s a close race, but I suspect that sugar subsidies are even more corrupt than dairy subsidies.

Read Full Post »

Trade, Farm Subsidies, and Mitchell’s Law

A couple of days ago, I shared a segment from a TV interview about trade and warned that retaliatory tariffs were a painful consequence of Trump’s protectionism.

I also was asked in that interview about the negative effect on farmers. I speculated that farmers (and many other groups) were giving Trump the benefit of the doubt in hopes that this process might actually lead to trade liberalization – sort of like what Trump suggested at the G7 meeting.

While I was depressed and glum in that interview, it turns out that things are worse than I thought.

Instead of keeping their fingers crossed for trade liberalization, farmers may be nonplussed by protectionism because President Trump’s expansion of bad trade policy may also wind up being the pretext for an expansion of bad agricultural policy.

The Wall Street Journal opines on the upside-down logic of Washington.

When pork prices collapsed amid a global trade war during the Great Depression, the Roosevelt Administration in 1933 had an idea—slaughter six million piglets. Put a floor under prices by destroying supply. It didn’t work. Now the Trump Administration may try its own version of Depressionomics by using the Commodity Credit Corporation (CCC) to support crop prices walloped by the Trump tariffs: Hurt farmers and then put them on the government dole.

Given the economic misery of the 1930s, it should be obvious that copying the awful policies of Hoover or Roosevelt is never a good idea.

But that’s not stopping the crowd in Washington.

In 2012 Congress put limits on CCC purchases of surplus commodities and on price supports after the Obama Administration used it for a costly 2009 disaster program without Congressional approval. But then out of the blue this year, Congress lifted the limits on CCC’s power to remove surplus crops from the market to support prices. Republicans made that change because the Trump Administration wants to use the CCC to mitigate the damage to U.S. crop prices from the Trump trade war. In a June 25 USA Today op-ed, Agriculture Secretary Sonny Perdue wrote that the Administration is ready to “begin fulfilling our promise to support producers, who have become casualties of these disputes.” Too bad these U.S. casualties were caused by friendly fire.

And don’t be surprised if today’s handouts wind up becoming permanent entitlements.

The bigger danger is that the need for Mr. Perdue’s “help” is unlikely to be temporary. …With the higher tariff, Beijing will turn even more to Brazil and Argentina for soy and grains; Australia and Chile for fruit, nuts and wine; and Canada and the European Union for some or all. …The CCC is a relic of Dust Bowl America. Today the American farmer is high-tech, productive and eager to compete. Mr. Trump’s trade policy is creating a problem that didn’t exist and next he may create another one to ease the pain he has caused.

In other words, one bad government policy is being used the justify another bad government policy.

This is a classic example of Mitchell’s Law, otherwise known as the lather-rinse-repeat cycle of government failure.

We see it when government over-spending is used as an excuse for big tax increases.

We see it when government-run healthcare is used as an excuse to impose nanny-state policies.

We see it when government drug-war failures are used as an excuse to push for gun control.

And now we’re seeing it when bad trade policy is leading to more bad farm subsidies.

I realize this is pure fantasy, but wouldn’t it be nice to have the reverse approach? How about we simultaneously eliminate trade barriers and get rid of the Department of Agriculture?

Given the inherent corruption of Washington, I won’t hold my breath for that outcome. I’ll have more luck waiting for this fantasy to become reality.

Read Full Post »

Sugar Subsidies Impose a Bitter Price on Workers, Consumers, and Taxpayers

Government intervention is not good for economic prosperity. That general observation is both accurate and appropriate, but it might also be helpful to contemplate what sector of the economy suffers the most damage and distortion because of government.

• In terms of aggregate impact, there’s a strong case to be made that government intervention – via spending, tax breaks, and price controls – wreaks the most havoc with the health sector.
• In terms of perverse results, it’s hard to imagine a more convoluted sector than higher education, where government intervention causes higher tuition and transfers wealth from the poor to the rich.
• In terms of all-encompassing, Soviet-style central planning, the plethora of handouts, subsidies, protectionism, and cronyism in the agriculture sector is hard to match.

Speaking of agriculture, let’s commemorate Valentine’s Day by exploring how politicians shower sugar producers with undeserved wealth every time one of us buys something sweet for a sweetheart.

Vincent Smith of the American Enterprise Institute shares some grim news on who is reaping unearned benefits.

Valentine’s Day is here again, and still the US sugar lobby has its hand in everyone’s wallet when they buy chocolate and other candy for their friends and families. For over four decades, the sugar lobby has managed to persuade Congress to maintain a Soviet-style supply control program that, by sharply limiting imports and curtailing domestic production, keeps US sugar prices well above free market levels. The program costs US consumers an average of about $3.4 billion every year, effectively a hidden annual tax of over $40 for a typical family of four, all to benefit fewer than 5,000 farm businesses. Further, the program raises production costs for the US food processing industry, damaging the food industry’s ability to compete in export markets and causing them to sacrifice a share of the domestic market to exporters from other countries. The impact of the US sugar program on employment for US citizens consistently has been estimated to be negative, costing the US economy between 10,000 and 20,000 jobs on a net basis. While the program creates employment for some workers in sugar refineries, it destroys far more employment opportunities in the US food processing sector by making the sector less competitive.

Two of his colleagues, John C. Beghin and Amani Elobeid, produced a detailed study on the topic for AEI. Here are the key findings.

The sugar program is a protectionist policy, which increases the domestic price of sugar above the corresponding world price. It restricts imports of raw and refined sugar, depresses world sugar prices, and substantially changes the mix of sweeteners used in processed food. Domestic markets are distorted, sugar users are effectively taxed by the program, and sugar producers are subsidized by it. The welfare transfer to sugar growers and processors is quite large in the aggregate, hovering around $1.2 billion. Losses to households are diffused, about $10 per person per year but large for the population as a whole, in the range of $2.4–$4 billion. …Gains to producers are concentrated in a few hands, especially in the cane sugar industry. Labor effects from lost activity in food industries are between 17,000 and 20,000 jobs annually.

For those who like the quantitative details, here’s a table with the most important numbers in the study.

Writing for the Federalist, Eric Peterson explains the high costs and inefficiency associated with this bit of central planning.

The history of candy canes dates back over 300 years… While this iconic symbol of Christmas saw its first mass production in America, Washington politicians have too often behaved like Scrooge, enacting policies that have sent all but one maker of this holiday classic fleeing abroad. One reason for the mass exodus is the little known U.S. sugar program. …Government interference in the sugar market comes in four flavors: Price supports, marketing allotments, import quotas, and the Feedstock Flexibility Program. …Although programs such as price supports (which mandate domestic prices for sugar at nearly double the world price) are fairly straightforward, programs such as Feedstock Flexibility are far more opaque. It allows sugar producers to sell sugar to the government at above market value, which the government then sells to ethanol producers at a loss. …Companies that need sugar for their products…can’t even import cheaper sugar from abroad thanks to import quotas that strictly limit foreign sugar. It’s no one wonder that some companies like Atkinson Candy Co have responded by moving some of their peppermint-candy production to Guatemala, where sugar is cheap and plentiful. …Consumers pay higher prices on everything from chocolate to cranberry sauce thanks to these big-government mandates, with the estimated annual costs to consumers and food manufacturers adding up to a whopping $3.5 billion annually. …Since 1997, for example, over 120,000 jobs have been lost in the sugar industry. It’s estimated for every job subsidies prop up, three are destroyed.

Notice, by the way, the consistent theme that subsidies and protectionism result in fewer jobs. This is not a surprising result for anybody who has looked at the fourth item in this column.

Let’s continue with some more analysis. The Foundation for Economic Education has a column by Ted Ellis on the program.

…for taxpayers, …sweetness doesn’t come cheap. For decades, domestic sugar producers have been protected from fair competition. In recent years, their influential lobby has ensured producers’ inflated profits through $260 million worth of federal subsidies and restrictions on fairly priced imported sugar. …these handouts rarely accrue to anyone but the industry’s largest and most well-connected players. …The National Confectioners’ Association, a trade group, agrees…that “the benefits of sugar subsidies and protections go directly to just 14 sugar beet and sugarcane producers in a few states.” …inflated prices disrupt domestic supply chains, threatening thousands of well-paying American manufacturing jobs, all while nibbling away at American taxpayers’ wallets. …the sugar program costs American businesses and consumers more than $3 billion every year. …the cost of special-interest lobbying in the sugar industry is felt most heavily by US workers laid off by companies that have been forced to move abroad, where sugar prices are cheaper. A 2006 report by the US International Trade Administration found that as many as 10,000 American jobs were lost as confectioners such as Hershey Co. and Lifesavers were forced by government-inflated domestic sugar prices to move plants out of the US. The same report found that the many jobs lost on account of federal intervention in sugar production far outweigh the few jobs saved for growers. In fact, it found that “for each one sugar growing and harvesting job saved through high US sugar prices, nearly three confectionery manufacturing jobs are lost.”

If you’re tired of reading about the senselessness of sugar subsidies, here’s a video on the topic from Reason. It has a Halloween theme instead of a Valentine’s Day theme, but that doesn’t change anything.

Let’s conclude with some hard-hitting analysis by Jim Bovard, who explains the tangled web of cronyism for CapX.

…the federal government has maintained an array of sugar import quotas and/or tariffs for most of the last 200 years. The regulatory regime has provided windfalls for generations of politicians and jobs for legions of bureaucrats while destroying more than a hundred thousand private, productive jobs. …The sugar program illustrates why politicians cannot be trusted to competently manage anything more complex than a lemonade stand. In 1816, Congress imposed high tariffs on sugar imports in part to prop up the value of slaves in Louisiana. In 1832, a committee of Boston’s leaders issued a pamphlet denouncing sugar tariffs as a scam on millions of low-paid American workers to benefit fewer than 500 plantation owners. …Despite perpetual aid, the number of sugar growers has declined by almost 50% in recent decades to fewer than 6,000. Federal policy failed to countervail the fact that the climate in the mainland U.S. is relatively poorly suited for sugarcane production. …Federal sugar policy costs consumers $3 billion a year and is America’s least efficient welfare program. In the 1980s, sugar import restrictions cost consumers $10 for each dollar of sugar growers’ income. …producing candy and many other food products is far more expensive here than abroad. Since 1997, sugar policy has zapped more than 120,000 jobs in food manufacturing… More than 10 jobs have been lost in manufacturing for every remaining sugar grower in the U.S. …The sugar lobby showers Congress with money, including almost $50 million in campaign contributions and lobbying between 2008 and 2013. In return, members of Congress license sugar growers to pilfer consumers at grocery checkouts and rob hardworking Americans of their jobs.

That last segment is the key. Sugar subsidies are a class case of “public choice,” with special interests and politicians both benefiting while ordinary people pay the price.

There are many reasons to shut down the Department of Agriculture. But it’s hard to imagine a bigger reason than getting rid of handouts for Big Sugar. Maybe ultra-corrupt ethanol handouts are even worse, but that’s a judgement call.

P.S. Since today is Valentine’s Day, here’s a very topical explanation of why unfettered prices are desirable.

P.P.S. And here’s a Libertarian Valentine’s Day. Or, for my statist readers, here’s Obama’s vision of Valentine’s Day.

Read Full Post »

The Insane World of Agriculture Subsidies

I’ve argued before that the Department of Housing and Urban Development (HUD) should be the top target of those seeking to shut down useless and counterproductive parts of the federal government.

And if President-Elect Trump’s choice for HUD Secretary, Ben Carson, is as sound on housing issues as he is on tax issues, presumably he will work to close down the bureaucracy that he’ll soon be overseeing.

But I just read a Wall Street Journal column about agriculture subsidies that has me so agitated, that I may change my mind and make the Department of Agriculture my top target for elimination. Here’s some of what Jim Bovard wrote.

President-elect Donald Trump’s vow to “drain the swamp” in Washington could begin with the Agriculture Department. …Farmers will receive twice as much of their income from handouts (25%) this year as they did in 2013, according to the USDA. …big farmers snare the vast majority of federal handouts. According to a report released this year by the Environmental Working Group, …“the top 1 percent of farm subsidy recipients received 26 percent of subsidy payments between 1995 and 2014.” The group’s analysis of government farm-subsidy data also found that the “top 20 percent of subsidy recipients received 91 percent of all subsidy payments.” Fifty members of the Forbes 400 list of wealthiest Americans have received farm subsidies, according to the group, including David Rockefeller Sr. and Charles Schwab.

Indeed, agriculture subsidies are basically a huge transfer of wealth from the poor to the rich.

…in 2015 the median farm household had a net worth of $827,307. That includes a great many residential, gentlemen and hobby farmers. The largest class of farmers—those who produce most farm products and harvest the largest share of the subsidies—have a median net worth of $2,586,000. By contrast, the median net worth for American households in 2013 was $81,200, according to the Federal Reserve.

In his column, Jim also explains some of the bizarre consequences of various specific handout programs, including the fact that American taxpayers have forked over $750 million to Brazil in order to continue huge (and impermissible, according to our trade commitments) subsidies to American cotton producers.

But the sugar subsidies are probably the most economically insane.

The U.S. maintains a regime of import quotas and price supports that drive U.S. sugar prices to double or triple the world price. Since 1997 Washington’s sugar policy has zapped more than 120,000 U.S. jobs in food manufacturing, according to a 2013 study by Agralytica. More than 10 jobs have been lost in manufacturing for every remaining sugar grower in the U.S.

Let’s look at some more evidence, this time dealing with dairy subsidies.

Charles Lane of the Washington Post wrote earlier this year about America’s government-caused cheese problem.

…as of March 31, 1.19 billion pounds had accumulated in commercial cold-storage freezers across the United States, the largest stockpile ever. …each American would have to eat an extra 3 pounds of cheese this year, on top of the 36 pounds we already consume per capita, to eliminate the big yellow mountain.

Why is there something as silly as a giant stockpile of cheese?

If you’re guessing it’s the result of a foolish government policy, you’d be right.

… the U.S. government has a long-standing pro-cheese-eating policy, which grew out of the need to do something with the subsidized excess of milk products generated by federal pro-production dairy policy… Two decades ago, in fact, the Clinton administration’s Agriculture Department helped form a promotional organization, Dairy Management Inc., funded by a congressionally authorized, federally collected dues requirement for dairy producers. Its $140 million annual budget has helped develop such fast-food items as Pizza Hut’s cheese-topped crust and Taco Bell’s double steak quesadillas, as well as cheesy pizzas for the federal school lunch program. …dairy farms are protected by a subsidized insurance program in the 2014 Farm Bill.

What’s the answer to this mess?

Well, even an editorial writer for the leftist Washington Post recognizes that markets, rather than subsidies, should determine cheese production.

In the long run, everyone — consumers, producers, middlemen, grocers — would probably be better off if governments just left the dairy market to its own devices. And a lot of other markets, too.

By the way, since we’re on the topic of subsidies to the dairy industry, a Bloomberg column exposes some of the perverse consequences of government intervention.

…some farmers tried to limit the supply of milk by killing off their own cows. No, you read that correctly. This mysterious state of affairs was revealed in a nationwide class-action lawsuit against dairy cooperatives, groups of farmers who pool their supplies but, as a whole, serve as middlemen between the farmers and dairy processors. …The “herd retirement program,” as it was called, was led by Cooperatives Working Together, run by the lobbying group National Milk Producers Federation, and supported by farms producing almost 70 percent of America’s milk. …The path that leads to killing perfectly good dairy cows begins with a 1922 law, the Capper-Volstead Act. The statute was designed to protect both dairy farmers and consumers from profiteering middlemen.

This story actually is a perfect storm of government stupidity. The federal government has programs that subsidize the dairy industry. That then leads to overproduction. Producers respond to overproduction with a plan to kill cows, which somehow triggers antitrust intervention by the government.

Heaven forbid we actually get the government out of the business and simply allow markets to work!

And if antitrust laws and agriculture subsidies are a bad combination, then you won’t be surprised to learn that foreign aid and agriculture subsidies are another bad combination. In other words, two negatives don’t make a positive, as explained by Jim Bovard earlier this year in another column for the Wall Street Journal.

The Obama administration’s plan to dump a million pounds of surplus peanuts into Haiti at no cost has sparked a firestorm from humanitarian groups… Haiti has about 150,000 peanut farmers. The industry is “a huge source of livelihood” for up to 500,000 people, Claire Gilbert of Grassroots International told NPR, “especially women, if you include the supply chains that process the peanuts.” …the Peasant Movement of Papaye, denounced the peanut donation as “a plan of death” for the country’s farmers. …American aid has a sordid record. In 1979 a development consultant told a congressional committee: “Farmers in Haiti are known to not even bring their crops to market the week that [food aid] is distributed since they are unable to get a fair price while whole bags of U.S. food are being sold.” …After the 2010 earthquake, Haiti’s president, René Préval, pleaded with the U.S. to “stop sending food aid so that our economy can recover and create jobs.” Former President Bill Clintonpublicly apologized the same year for the devastating impact of subsidized U.S. rice imports: “I have to live every day with the consequences of the lost capacity to produce a rice crop in Haiti to feed those people, because of what I did.”

The peanut program may be even more inanely destructive than the sugar program.

The real culprit here are federal peanut programs with an almost 80-year record as one of Washington’s most flagrant boondoggles. Subsidies have encouraged farmers to overproduce and then dump surplus peanuts on the USDA, which winds up stuck with hundreds of millions of pounds. That food has to go somewhere, and the department sees Haiti as the ticket. Food-aid policies have long been driven not by altruism, but by bureaucratic desperation to dispose of the evidence of failed farm policies. …The cost of peanut subsidies is predicted to rise 10-fold between 2015 and next year, reaching $870 million—which approaches the total farm value of the whole U.S. peanut crop itself. The USDA expects to spend up to $50 million a year to store and handle surplus peanuts, and industry experts are warning that federally-licensed warehouses might not have enough space to hold the next crop.

Though this humorous image reminds me that ethanol handouts also may be the most counterproductive and wasteful agriculture subsidy.

Agriculture subsidies are bad for taxpayer and bad for consumers. They are a corrupt transfer of unearned wealth to special interest groups.

P.J. O’Rourke came up with the only appropriate solution to this mess.

Read Full Post »